Essar Steel Ltd has a loan default of Rs 37,284 crore. In August, the National Company Law Tribunal (NCLT) admitted insolvency proceedings against it. Two months later, its parent company Essar Group was learnt to be one of the bidders to purchase the stressed asset. Essar Group said the company was doing it because the Insolvency and Bankruptcy Code allowed promoters to bid for their company.
What would have happened in this case? Essar group would have repurchased its own insolvent subsidiary at a discount without having to repay the debt. To stop this, the government, first, asked banks to be vigilant to ensure that wilful defaulters are prevented from buying stressed assets again, and then, came up with an Ordinance to stop the damage as soon as possible with 12 companies with big loan defaults already under insolvency process.
The idea of the Ordinance was to “put in place safeguards to prevent unscrupulous, undesirable persons from misusing or vitiating the provisions of the Code”. The government said that the Ordinance was introduced with an aim to keep out wilful defaulters and people associated with non-performing assets or those who are habitually non-compliant, who pose a risk to the successful resolution of the insolvency of a company.
If in the end, it is about promoters buying stressed assets of their own companies, why take insolvency route instead of debt-restructuring? The Ordinance is going plug this leak in the IBC. Moreover, with wilful defaulters or promoters being prevented from the bidding process, banks are likely to get a better deal. “Preventing wilful defaulters from bidding for stressed assets will help banks get better prices for the assets and will move the pending cases faster,” A K Prabhakar, head of Research, IDBI Capital told Reuters.
“The ordinance has now made it very explicit…I will be happy when the resolution happens. I don’t mind some haircut but I don’t want to (go) bald,” SBI chief Rajnish Kumar said.
JSW Steel’s Sajjan Jindal recently tweeted: “It will be a setback to the credible IBC process if the existing promoter reacquires the asset with a haircut without right of recompense to banks.” Sanjay Grover, the managing partner at company secretary firm Sanjay Grover & Associates and an insolvency professional, said: “The move to bar unscrupulous wilful defaulters is a positive one. It was necessary to keep such unscrupulous elements out of the insolvency process. Otherwise, it would encourage more defaults.”